In This Article:
Today we are going to look at Geratherm Medical AG (ETR:GME) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Geratherm Medical:
0.061 = €1.7m ÷ (€33m - €5.4m) (Based on the trailing twelve months to September 2019.)
Therefore, Geratherm Medical has an ROCE of 6.1%.
View our latest analysis for Geratherm Medical
Does Geratherm Medical Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Geratherm Medical's ROCE is meaningfully below the Medical Equipment industry average of 13%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Geratherm Medical stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
We can see that, Geratherm Medical currently has an ROCE of 6.1%, less than the 12% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Geratherm Medical's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Geratherm Medical? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.